Money and Banking
What the domain tests
Money and Banking tests the functions and measures of money, commercial bank credit creation, and central bank monetary policy. You must know the money supply aggregates, reserve ratios, and the instruments used to control credit.
Core rules
- Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment.
- Money supply: M1 = currency with the public + demand deposits + other deposits with the RBI; M3 = M1 + net time deposits. M1 is narrow money; M3 is broad money.
- Credit creation: commercial banks create demand deposits from cash reserves. The simple money multiplier is 1/reserve ratio; total deposits = initial deposit × multiplier.
- Central bank tools: repo rate, reverse repo, CRR, SLR, open market operations, and margin requirements. Raising CRR or the repo rate generally contracts credit.
Worked example
A bank receives a primary deposit of ₹1,000 and the CRR is 10%. Required reserves are ₹100, and ₹900 can be lent. If the whole banking system lends repeatedly, total deposits = 1,000 × (1/0.10) = ₹10,000. Credit created = ₹10,000 − ₹1,000 = ₹9,000. This assumes no cash leakage and no excess reserves.
Traps that cost marks
Do not say CRR and SLR are the same: CRR is the cash reserve with the RBI; SLR is held in approved assets. Do not count currency held by banks as money with the public. Do not confuse repo, where the RBI lends, with reverse repo, where the RBI borrows. Credit creation is limited by cash reserves, not unlimited. The central bank does not create all deposits directly.